Overview
On February 21, 2025, President Trump issued a memorandum aimed at addressing "overseas extortion and unfair fines and penalties" levied against American technology companies. Among other things, the memorandum directs various government agencies to take actions including potentially expanding existing investigations into foreign Digital Services Taxes, imposing retaliation against discriminatory taxes, and reviewing regulatory barriers like data flow restrictions and extraterritorial regulation and fines. The affected agencies are required to report their results to the President by April 1, 2025.
While the principal target of this memorandum is the EU, we believe it could serve as the basis for potential tariffs against other countries as well, perhaps as part of President Trump's "reciprocal trade" policy. This alert reviews the background of this dispute and the potential impact of this memorandum.
The Digital Taxation Dispute
For several years, governments have been reevaluating international tax rules as digital businesses operate in their jurisdictions but without a significant physical presence. Many countries have introduced Digital Services Taxes (DSTs) on revenues generated from digital services such as providing online advertising, music and video streaming, and operating online marketplaces. These taxes frequently impact – and target – the overseas revenues of large US technology companies. The leading jurisdiction imposing these DSTs is the EU, but DST proposals were also advanced by more than 30 countries, including the United Kingdom, France, Italy, Spain, and Canada[i].
The Biden Administration participated in the Organization for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) Inclusive Framework to advance Pillar One negotiations, which aim to redistribute a portion of multinational’s profits while eliminating or significantly curtailing DSTs worldwide. In contrast, the Trump Administration rejected this approach in a recent memorandum, favoring a no-carrot, stick-only strategy that threatens retaliation against countries imposing DSTs on US companies.
The New Directives – Bracing for a More Taxing Trade War.
In line with the Trump Administration’s policy of identifying unfair practices for retaliation, the memorandum directs the USTR – as well as other agencies – to investigate the following, and to report their results to the President by April 1, 2025:
- Consider Renewing or Launching New DST Investigations under Section 301 of the Trade Act of 1974: The memorandum directs the United States Trade Representative (USTR) to determine whether to renew previous investigations conducted under Section 301 of the Trade Act of 1974 (19 USC. 2411) regarding the DSTs of France, Austria, Italy, Spain, Turkey, and the United Kingdom. In 2021, these cases resulted in 25% tariffs on certain imports (e.g., French wine, UK cosmetics, and Spanish olives), which were suspended in favor of bilateral negotiations, and were contingent upon a determination that any DSTs imposed would be consistent with the results of the OECD process.
- USTR must also consider whether to investigate the DST of any other country that may discriminate against United States companies or burden or restrict United States commerce pursuant to Section 301. One such DST is Canada"s 3% digital tax on user data licensing and digital services revenues, which could prompt a panel review under the USMCA[ii], if USTR believes one is warranted, and/or other retaliatory action.
- Identify Other Discriminatory Digital Trade and Regulatory Practices, Particularly with Respect to Content Moderation. The Secretary of the Treasury, the Secretary of Commerce, and the USTR must jointly identify other regulatory practices that "discriminate against, disproportionately affect, or otherwise undermine the global competitiveness or intended operation of United States companies" and recommend appropriate actions to counter such practices under other applicable authorities. The memo also directs USTR to focus on the policies and practices of the EU and the United Kingdom that "undermine freedom of speech and political engagement or otherwise moderate content." A fact sheet accompanying the memo notes that the Administration will scrutinize the EU Digital Services Act (DSA), which imposes content moderation obligations on large online platforms, and the EU Digital Markets Act (DMA) which subjects online "gatekeepers" to specific regulations due to market competition concerns from EU policymakers. Both measures subject large US technology companies to significant regulation and are enforced through large fines based on the firms' global revenues.
- Secure Prohibitions on E-commerce Duties: Additionally, under the memorandum, USTR must consider necessary tools to secure a permanent prohibition on customs duties on electronic transmissions. In 2024, the World Trade Organization extended its long-standing "e-commerce moratorium" until the next ministerial conference in 2026, despite attempts from India, South Africa, and others who advocated for the end of the policy.
- Tax Retaliation through Section 891 of the Internal Revenue Code: For the first time, the administration is contemplating the invocation of Section 891, which permits the US to double tax rates on companies and individuals from countries that impose discriminatory taxes on US businesses. Consequences for foreign investors in the US could be severe, with withholding taxes on dividends, royalties, and rents potentially rising from 30% to 60%. Foreign corporations may face corporate tax rates increasing from 21% to 42%. Likewise, non-resident individual taxpayers could see graduated tax rates increase from 20% to 74%. Unlike the other issues set out in the memorandum, the Secretary of the Treasury must make this determination by March 20, 2025.
The memorandum indicates that Section 301 of the Trade Act and Section 891 of the Internal Revenue Code will serve as the main tools for addressing discriminatory DSTs and foreign tax measures. However, other trade authorities, such as the International Emergency Economic Powers Act (IEEPA) and Section 338 of the Trade Act, could be employed to impose prompt retaliatory tariffs or other countermeasures against unfair foreign policies.
Congressional Republicans Support Tax Retaliation and Adjustments to the OECD's Global Tax Deal
In a recent letter to President Trump, congressional Republicans supported the use of Section 891 and criticized the OECD’s global tax deal. Pillar One has raised concerns in the US because it applies principally to US companies, redistributing a portion of their profits among market jurisdictions without entirely eliminating all DSTs.
Pillar Two's 15% Global Minimum Tax has also raised concerns. Opponents note that it disadvantages US tax incentives such as the Foreign-Derived Intangible Income (FDII) deduction[iii] and R&D credits[iv], and may allow jurisdictions with tenuous claims to US business revenues to tax those revenues via the Undertaxed Payments Rule (UTPR) mechanism[v].
Next Steps and Implications
The USTR and DOC are also tasked with creating a reporting system for US companies to flag discriminatory foreign taxes and regulations, expanding beyond Section 301's existing petition process. Currently, USTR is soliciting public comments on non-reciprocal foreign trade actions, and information collected as part of the process may also be used to identify discriminatory policies and practices and shape related US trade actions.
Given the uncertain outcome of the OECD negotiations on DSTs and rising trade tensions, US firms should brace for additional Administration actions prioritizing economic sovereignty over multilateral diplomacy. The Trump Administration’s memorandum potentially escalates trade and tax enforcement against foreign digital tax regimes and other tech regulations. Companies operating globally should monitor USTR investigations, assess the risks of potential retaliatory tariffs, and evaluate the impact of Section 891 tax retaliation on foreign operations.
[i] Computer & Commc’ns Indus. Ass’n, Global Landscape of Digital Services Taxes (2024), https://ccianet.org/articles/global-landscape-of-digital-services-taxes/.
[ii] See. Office of the US Trade Representative, United States Requests USMCA Dispute Settlement Consultations on Canada's Digital Services Tax (Aug. 30, 2024), https://ustr.gov/about-us/policy-offices/press-office/press-releases/2024/august/united-states-requests-usmca-dispute-settlement-consultations-canadas-digital-services-tax (announcing that the United States has initiated dispute settlement consultations under the United States-Mexico-Canada Agreement (USMCA) concerning Canada's recently enacted Digital Services Tax (DST), which imposes a 3% tax on revenues from certain digital services and is alleged to discriminate against US companies, potentially violating USMCA provisions).
[iii] See. I.R.C. § 250(a) (providing a deduction for Foreign-Derived Intangible Income (FDII), which incentivizes US corporations to derive income from exports of goods and services by allowing a deduction based on a deemed intangible income formula).
[iv] See. I.R.C. § 174 (authorizing a deduction for certain research and experimental expenditures, allowing taxpayers to currently deduct such costs rather than capitalizing and amortizing them)
[v] See. OECD, Tax Challenges Arising from the Digitalisation of the Economy: Global Anti-Base Erosion Model Rules (Pillar Two) (2021) (introducing the Undertaxed Profits Rule (UTPR) as a secondary mechanism to the Income Inclusion Rule (IIR), permitting jurisdictions to impose top-up taxes on multinational enterprises when the IIR has not been fully applied, thereby ensuring a minimum effective tax rate of 15% in each jurisdiction where they operate).
